People have been complaining about the budgeting and planning processes in their organizations for decades. If you’re old enough, you may recall President Carter’s failed attempt to use something called zero-based budgeting to impose discipline in federal outlays. (In his first year in office the federal government reported a whopping $54 billion deficit.) Some complaining is almost inevitable, but some reflects the one-way nature of the process. People spend time on creating a budget and don’t feel they get enough back from their time spent.

I’ve been studying the issue for 15 years. Six years ago I coined the term “integrated business planning” (IBP) to cover a different approach to planning and budgeting, which I summarized in a recent blog post. IBP is designed to address many of the inherent defects in the way companies plan and budget. Our recent benchmark research on integrated business planning illustrates some of these fundamental issues.

Accuracy is an important attribute for budgeting; in fact, accuracy is the most cited reason why companies elect to change their budgeting process. Our research found that two-thirds of organizations say that their company’s budgets are either accurate or very accurate – an impressive result. However, while accuracy is key for the control of a company, it’s not necessarily the most important consideration for managing operations effectively.

Some years ago, I was attending a user group meeting where the head of financial planning and analysis (FP&A) of a large publicly traded company was offering a success story. He related that after purchasing a vendor’s planning and budgeting software, his company was able to increase budget accuracy from 89 percent to 96 percent. I guess in some respects this was inspiring, but I knew that his company had just missed its revenue and earnings per share (EPS) targets six quarters in a row. The company had great spending controls, but it was rigid, and the product of all that spending was not achieving the more important objective of closing business and meeting business objectives.

Rather than enforcing rigid spending allocations, IBP focuses on managing critical business ratios that characterize key input-output relationships. In a direct sales business model, “managing the funnel” is a focus of sales executives because it provides reliable leading indicators for the company to close deals and generate revenues. The funnel represents the progression of prospective buyers from sales lead to confirmed customer. Almost always, companies have sequentially fewer potential customers as they move from one stage of the funnel to the next, and the percentage converted to each subsequent stage is a key ratio. If these conversion ratios exceed expectations or fall short, it’s important to understand the reasons why and to adapt the rest of the organization (and therefore change spending allocations) to reflect potential changes to projected future sales activities. IBP also uses a rolling five- or six-quarter planning horizon with monthly updates to enable it to be more adaptable to changing business conditions. After all, Darwin expressly observed that it wasn’t the survival of the fittest but the ability to adapt that makes a species successful.

In that same vein, our recently completed research shows that companies do not adapt well to change. Fewer than one-fourth (23%) find it easy to change the details of their annual plan when circumstances change significantly. Decisions wind up being made in a vacuum. Only 22 percent say they can accurately measure the impact of their individual plans on the rest of their company. Half say that when plans change during the year in one part of the business it is only somewhat or not at all coordinated with plans in the rest of the company. Only four percent characterize their response as very well coordinated within their organizations. The lack of coordination is common, affecting 42 percent of organizations, and 16 percent say that dealing with it consumes a lot of time and effort. Yet the data also shows that companies that directly link their plans across an organization have fewer issues with coordination than those that have indirect or no links in their planning process.

A key objective for planning and budgeting is to set baselines with which to assess and manage performance. Yet only one-fourth (23%) of organizations are able drill down into numbers during reviews to understand causes. The rest have to wait hours or days to get the answer to why results were better or worse than expected. Assessing performance is essential to making decisions about what to do in response to outcomes or business conditions that are different from those assumed when the initial plans were made. The issue here is that important decisions are deferred while executives and managers wait for numbers, or those officers act on gut instinct instead of waiting.

In order to change, organizations first need to recognize what’s wrong with the way they plan and budget and see that a better way is not hard to adopt. Transforming planning and budgeting into a more useful business tool doesn’t have to be difficult. I outlined a measured approach in an earlier blog post. Better technology, and a better process that incorporates the capabilities better technology can provide, are essential elements, and these are neither too difficult nor too expensive to prevent organizations from using new methods. I think the hardest part is deciding to make the fundamental changes.